As part of their quarterly earnings review, analysts at Goldman Sachs scour the conference calls of 50 companies, representing over 30% of the market cap of the S&P 500, to find clues about the health of the world economy. The 2Q 16 review generally found that consumer sentiment is mixed due to political and economic uncertainty, margins are expected to be flat to down in 2016, the strong dollar is hurting domestic companies and Brexit is already causing companies to take a cautious stance toward Europe.
Below are come of the key takeaways:
Theme 1: Consumers sentiment mixed with companies expressing concerns that consumers will postpone spending due to rising political and economic uncertainty. However, Financial firms noted an improvement in household balance sheets. Notable comments included:
Union Pacific Corp. (UNP): A soft global economy, the negative impact of the strong U.S. dollar on exports and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year.
Simon Property Group (SPG): In the outlet business, our traffic is up 2.65% year-to-date, even though spend is down in some of the tourist-oriented centers. On the malls, what we’re finding is that the traffic is stable, and interestingly, I know a lot of retailers have reported decreased traffic. What we’re seeing is that the consumers are still in our properties, but they are visiting less stores on each visit.
Visa Inc. (V): The consumer has remained remarkably steadfast in the face of significant global instability.
Theme 2: Pockets of margin expansion in 2Q despite index-level contraction. S&P 500 margins including and excluding Energy contracted in 2Q, but some companies expanded margins by driving efficiency. We expect Energy sector margins will recover and ex-Energy margins will be flat through the end of the year
Equity Residential (EQR): We have left our annual same-store expense range at an increase of 2.5% to 3%. And this is notwithstanding the fact that same-store expenses year-to-date have only grown by 0.9%. This implies that we expect second half same-store expenses to grow at a considerably higher rate of about 4.6%...I mean, when you look at the new lease-ups, if new lease-ups are getting one month free, basically, you can move into a brand new building at 2015 rent. If a new leaseup is getting two months free, you can move into a brand new building at 2014 rents.
3M Co. (MMM): In the second quarter, we delivered healthy margins of 24.4%, up 50 basis points year over year…The combination of lower raw materials and higher selling prices contributed 130 basis points to our margin improvement, while lower pension and OPEB expense increased margins by another 110 basis points. Productivity gains related to last year’s fourth quarter restructuring expanded margins by an additional 40 basis points.
Theme 3: Strong dollar was a headwind in 2Q, but firms have mixed outlooks for 2H. We expect the year/year appreciation of the trade-weighted dollar will moderate in 3Q.
Simon Property Group (SPG): Reported retail sales continue to be negatively impacted by the strong dollar at some of our tourist-oriented malls and outlets.
McDonald’s Corp. (MCD): Given recent currency fluctuations, foreign currency translation is now expected to have a more significant impact on our reported results than previously estimated. Based on current exchange rates, we project foreign currency translation to negatively impact our earnings per share by $0.02 to $0.04 in the third quarter and $0.09 to $0.11 for the full year.
Theme 4: Recent volatility from Brexit but long-term effects are unclear. Firms are uncertain about the impact of Brexit pending terms of separation from the EU. Many companies expect lower interest rates, currency pressures, and mixed consumer sentiment.
JPMorgan Chase (JPM): …on Brexit…So number one, we do think it will reduce the GDP the UK and the EU a little bit. Obviously, that’s not going to affect our business plans though it will affect the economies a little bit. Number two, we know it is going to create uncertainty for an extended time period… I’m not really worried about it. It would be nice if it doesn’t create a huge turmoil. So I’m hoping the EU is sensible, but we’re going to be prepared...There are a range of outcomes, and anyone in our shoes will try to be prepared for each one of them. But we’re not going to pull back on serving people in Italy, Germany, France, UK, or Spain because it might lead to higher costs. I would accept the higher costs as opposed to disrupt our clients.
Delta Air Lines (DAL): Now, with the foreign currency pressure from the steep drop in the pound, the economic uncertainty from Brexit, and continuing yield pressures in the North Atlantic, we’ve decided to take an additional six points of capacity out of the UK for the winter…
Which is all fine... except that it destroys the mainstream media's narrative that the consumer is doing great, that earnings are about to hockey-stick higher, and The Fed's talk that a strengthening USD is nothing to worry about and Brexit is behind us...
